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Though house prices have risen much faster than wages of late, given a cocktail of strong demand and tight supply we estimate that house prices are overvalued by just 2%. The demand drivers are set to become less supportive and we expect the market to slow over the next two years. A crash looks unlikely, but if it did occur it would have a significant impact on the economy.

The increase in stamp duty on buy-to-let properties and second homes has made the housing market very hard to read of late. But the underlying picture appears to be one of stable activity, albeit at levels well below those seen prior to the financial crisis, with prices rising rapidly, pushing the price to earnings ratio close to its previous peak.

However, our modelling suggests that this relatively rapid inflation has been backed by strong fundamentals, so prices are only very slightly overvalued.

The support from strong growth in real incomes and sharp falls in unemployment is now fading. Low interest rates and supply constraints will provide some offset, but our forecasts for the underlying drivers are consistent with house price inflation slowing from just under 7% a year in 2015-16 to below 3% in 2017-18.

Fears about the potential for the buy-to-let market to trigger a wider collapse appear overstated, but the prime market does look more vulnerable. We have run a scenario on the Oxford Global Model where problems in the prime market ripple out and cause a 10% fall in UK house prices. This would reduce the level of GDP by 1¼% relative to the baseline forecast by end-2017 and require the MPC to cut Bank Rate to zero.

But we would consider this scenario to be a tail risk. The prime market tends to be fairly self-contained, with the wider market only usually seeing prices crash if increases in interest rates and/or unemployment trigger forced sales. The chances of either happening appear low. As such, we judge that the housing market is more likely to be affected by problems in the wider economy than vice-versa.

Emphasis mine

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Though house prices have risen much faster than wages of late, given a cocktail of strong demand and tight supply we estimate that house prices are overvalued by just 2%. The demand drivers are set to become less supportive and we expect the market to slow over the next two years. A crash looks unlikely, but if it did occur it would have a significant impact on the economy.

The increase in stamp duty on buy-to-let properties and second homes has made the housing market very hard to read of late. But the underlying picture appears to be one of stable activity, albeit at levels well below those seen prior to the financial crisis, with prices rising rapidly, pushing the price to earnings ratio close to its previous peak.

However, our modelling suggests that this relatively rapid inflation has been backed by strong fundamentals, so prices are only very slightly overvalued.

The support from strong growth in real incomes and sharp falls in unemployment is now fading. Low interest rates and supply constraints will provide some offset, but our forecasts for the underlying drivers are consistent with house price inflation slowing from just under 7% a year in 2015-16 to below 3% in 2017-18.

Fears about the potential for the buy-to-let market to trigger a wider collapse appear overstated, but the prime market does look more vulnerable. We have run a scenario on the Oxford Global Model where problems in the prime market ripple out and cause a 10% fall in UK house prices. This would reduce the level of GDP by 1¼% relative to the baseline forecast by end-2017 and require the MPC to cut Bank Rate to zero.

But we would consider this scenario to be a tail risk. The prime market tends to be fairly self-contained, with the wider market only usually seeing prices crash if increases in interest rates and/or unemployment trigger forced sales. The chances of either happening appear low. As such, we judge that the housing market is more likely to be affected by problems in the wider economy than vice-versa

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The econometric model Oxford Economics use has no fewer than 26,500 (!) linked equations, allegedly combining the most merit-worthy aspects of VAR and DSGE to estimate the speed at which dependent variables return to equilibrium after a shock.

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This would reduce the level of GDP by 1¼% relative to the baseline forecast by end-2017 and require the MPC to cut Bank Rate to zero.

Don't you just love that arrogance? "Require"?!

Our very high inflation over the last 8 years also REQUIRED the MPC to increase interest rates, because that is what they are tasked to do by an Act of Parliament (use interest rates to keep inflation close to the target) - yet they refused.

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The econometric model Oxford Economics use has no fewer than 26,500 (!) linked equations, allegedly combining the most merit-worthy aspects of VAR and DSGE to estimate the speed at which dependent variables return to equilibrium after a shock.

Science it is not.

Hahahaha hahahaha.

Seriously though, 26,500 variables doesn't mean it isn't science. For that you'd need to show that one of the model premises was invalid...

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Seriously though, 26,500 variables doesn't mean it isn't science. For that you'd need to show that one of the model premises was invalid...

Oh.

Depends on your view of modeling. I go on the Oxford dictionary of economics' definition of an overfitted model. This is where the uncertain predictive variables outnumber the validation variables (in this case variable). Science is full of overfitted models built by over confident career academics. An overfitted model has no predictive value.

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Seriously though, 26,500 variables doesn't mean it isn't science. For that you'd need to show that one of the model premises was invalid...

Oh.

I should copy the first line of your post- Haha indeed.

I seem to recall using 6 variables to pull a particular event topography, which occured with a frequency of a few/million events, out of a dataset of circa 250 million events.

26k variables (if correct) is a ludicrous proposition for any sort of statistically defensible study. How would you determine the sensitivity of the fit to variations in the fitted variables? Borrow CERN's computing resources for the next decade?

One factor in determining whether something is worth much credibility is the presence or absence of any attempt at quantifying errors. The empirical basis of scientific truth is " x +/- y ". BoE fan charts excepted, obviously.

Edit, we all know it's not supposed to be a rigorous exercise of course. But still. Come on, eh.

Edited June 7, 2016 by The Knimbies who say No

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Depends on your view of modeling. I go on the Oxford dictionary of economics' definition of an overfitted model. This is where the uncertain predictive variables outnumber the validation variables (in this case variable). Science is full of overfitted models built by over confident career academics. An overfitted model has no predictive value.

Yep an nth degree polynomial can fit any n+1 points. All scientist-based researchers should have better statistical training or get a statistically-trained coauthor to go through their proposals, methods and results beforehand. The amount of disinformation that get's to the public without any recourse is ridiculous. A headline and maybe a short description will be picked up by the target audience, then nothing. It imprints some sort of 'fact' in people's minds who don't look into the details or methods, which is likely a minuscule percent of the population.

If Britain leaves the EU and gets rid of the Human Rights Act, hopefully a law will be put in place that whoever intentionally misuses the scientific method or knowingly retells fabricated/manipulated results; should be hung, drawn and quartered or catapulted straight into a cliff face.

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..... A headline and maybe a short description will be picked up by the target audience, then nothing. It imprints some sort of 'fact' in people's minds who don't look into the details or methods, which is likely a minuscule percent of the population.....

That's down to shoddy reporting. How many times do you see the same story that's just a copy 'n' paste from the original press report?

No questions asked, no thoughts given. Just copied/pasted 100 times verbatim.

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I rent a rather nice house 45 minutes outside of London. There's a similar house that just came on the market for sale near me, and the asking price for that house is 200 times higher than my annual rent. 200 times. The idea that the housing market is not overvalued is completely farcical.